The Government and the Bank of England may extend the Funding for Lending scheme this week, according to reports, as policymakers strive for growth measures ahead of knife-edge GDP data that could confirm the UK is back in recession.

The Bank of England would neither confirm nor deny newspaper reports this morning that the £80billion Funding for Lending scheme will be extended with a greater focus on making sure cheap money reaches small business borrowers.

Ministers are thought to be anxious that an assessment of the UK economy by the International Monetary Fund (IMF) next month will repeat the claim made last week by IMF chief economist Olivier Blanchard that Chancellor of the Exchequer Osborne was ‘playing with fire’ by pressing ahead with his austerity plan.

Banking on an upswing: Chancellor George Osborne may extend the Bank of England lending scheme to fight off a new recession.

The UK will find out on Thursday if it has reentered recession. If GDP growth was negative in the first quarter of 2013 it will signal an unprecedented 'triple-dip' recession.

It is possible future upward revisions to growth data could mean a dip in the last quarter of 2011 and the first two quarters of 2012 - the second of a potential three part dip - was not technically a recession, defined as two consecutive quarters of negative growth. The Office for National Statistics will only confirm any new revisions in June.

On Friday, Fitch cut Britain’s credit
rating from AAA to AA+. The humiliation is the second this year after
Moody’s downgraded Britain’s AAA status in February.

Funding for Lending is the part of the Government's attempts to rejuvenate the slowing economy. Since launching last summer, the scheme has provided funding for banks on better terms than they could get from the money markets, on the condition that they then lend this money on to individual and businesses.

Bad news comes in threes: Negative GDP growth in Q1 2013 would mean the UK is back in recession for the third time since the start of the financial crisis.

However, the scheme has been criticised for pumping money primarily into cheaper mortgages for those who already have large equity stakes, rather than into better rates for business loans or for first-time buyers that are struggling to meet tougher lending criteria from banks.

Press reports suggest that Funding for Lending could be extended for a year beyond the current scheduled end date in 2014, and be opened up to non-bank institutions such as as asset-based lenders, invoice finance houses and leasing firms.

The proposals were welcomed by business groups. John Longworth, Director General of the British Chambers of Commerce, said: 'While we will have to wait for firm details of the Treasury's proposals to emerge, we welcome the Chancellor's determination to look at ways to make Funding for Lending work for UK businesses, many of whom still feel frozen out from access to finance.

'Much will depend on lenders' appetite for risk, but widening the types of business finance covered by the scheme can only be a positive move.'

The Bank does not provide a breakdown of how Funding for Lending cash is used by banks but separate data has indicated no increase in lending to business - seen as vital in the fight to get the economy growing.

HOW MUCH LENDERS HAVE RECEIVED THROUGH FLS COMPARED WITH NET LENDING

(These are the only lenders to receive FLS so far)

Source: Bank of England

LENDER

CUMULATIVE NET LENDING SINCE 30/06/12 (£m)

FLS DRAWING AS AT 31/12/12 (£m)

Aldermore

479

205

Barclays

5,701

6,000

Coventry BS

978

100

Cumberland BS

43

5

Julian Hodge Bank

25

18

Leeds BS

379

200

Lloyds Banking Group

-5,636

3,000

Metro Bank

93

29

Monmouthshire BS

37

5

Nationwide BS

3,600

2,010

RBS Group

-2,358

750

Santander

-6,308

1,000

Virgin Money

1,089

510

Meanwhile, mortgage rates have been falling - mostly for low loan-to-value loans that require less capital to be held by lenders, including buy-to-let mortgages, but also for those with less to put down as a deposit.

A further effect has been a collapse in savings rates because the scheme has reduced the need for lenders to raise cash from depositors with attractive returns.

Data published since the start of Funding for Lending has even suggested that net lending by banks had fallen since it's introduction. Lat month the Bank reported that net lending by banks and building societies was down £1.5billion in the six months since its launch, even though they have borrowed £13.8billion through the scheme.

Net lending in the quarter to December 31 fell by £2.4billion on the previous quarter, despite participants of the FLS drawing down £9.5billion over the period.

The impact of the scheme may take time to be fully realised, for example it can take months for mortgage applications to be accepted and thus for FLS loans to filter through. The Bank will assess each bank's lending at the end of this year. If they have failed to lend scheme money on, they will be charged more for the funds they have drawn down.

New lending data due in June should give a firmer indication of the impact the scheme having.